PROJECT RISK MANAGEMENT

SHWETANG PANCHAL

SIGMA INSTITUTE OF MANAGEMENT STUDIES

Learning Objectives

Understand what risk is and the importance of good project risk management

Discuss the elements involved in risk management planning List common sources of risks on information technology

projects Describe the risk identification process and tools and

techniques to help identify project risks Discuss the qualitative risk analysis process and explain how to

calculate risk factors, use probability/impact matrixes, the Top Ten Risk Item Tracking technique, and expert judgment to rank risks

Learning Objectives

Explain the quantify risk analysis process and how to use decision trees and simulation to quantitative risks

Provide examples of using different risk response planning strategies such as risk avoidance, acceptance, transference, and mitigation

Discuss what is involved in risk monitoring and control Describe how software can assist in project risk

management Explain the results of good project risk management

The Importance of Project Risk Management

Project risk management is the art and science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives

Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates

KPMG study found that 55 percent of runaway projects did no risk management at all

Project Management Maturity by Industry Group and Knowledge Area

What is Risk? A dictionary definition of risk is “the possibility of loss or

injury” Project risk involves understanding potential problems

that might occur on the project and how they might impede project success

Risk management is like a form of insurance; it is an investment

Risk Utility Risk utility or risk tolerance is the amount of satisfaction

or pleasure received from a potential payoff Utility rises at a decreasing rate for a person who is risk-

averse Those who are risk-seeking have a higher tolerance for risk

and their satisfaction increases when more payoff is at stake The risk-neutral approach achieves a balance between risk

and payoff

Risk Utility Function and Risk Preference

What is Project Risk Management? The goal of project risk management is to minimize potential risks

while maximizing potential opportunities. Major processes include Risk management planning: deciding how to approach and plan the risk

management activities for the project Risk identification: determining which risks are likely to affect a project

and documenting their characteristics Qualitative risk analysis: characterizing and analyzing risks and

prioritizing their effects on project objectives Quantitative risk analysis: measuring the probability and consequences

of risks Risk response planning: taking steps to enhance opportunities and

reduce threats to meeting project objectives Risk monitoring and control: monitoring known risks, identifying new

risks, reducing risks, and evaluating the effectiveness of risk reduction

Risk Management Planning

The main output of risk management planning is a risk management plan

The project team should review project documents and understand the organization’s and the sponsor’s approach to risk

The level of detail will vary with the needs of the project

Questions Addressed in a Risk Management Plan

Contingency and Fallback Plans, Contingency Reserves

Contingency plans are predefined actions that the project team will take if an identified risk event occurs

Fallback plans are developed for risks that have a high impact on meeting project objectives

Contingency reserves or allowances are provisions held by the project sponsor that can be used to mitigate cost or schedule risk if changes in scope or quality occur

Common Sources of Risk on Information Technology Projects

Several studies show that IT projects share some common sources of risk

The Standish Group developed an IT success potential scoring sheet based on potential risks

McFarlan developed a risk questionnaire to help assess risk

Other broad categories of risk help identify potential risks

Information Technology Success Potential Scoring Sheet

Success Criterion Points

User Involvement 19

Executive Management support 16

Clear Statement of Requirements 15

Proper Planning 11

Realistic Expectations 10

Smaller Project Milestones 9

Competent Staff 8

Ownership 6

Clear Visions and Objectives 3

Hard-Working, Focused Staff 3

Total 100

McFarlan’s Risk Questionnaire1. What is the project estimate in calendar (elapsed) time?

( ) 12 months or less Low = 1 point

( ) 13 months to 24 months Medium = 2 points

( ) Over 24 months High = 3 points

2. What is the estimated number of person days for the system?

( ) 12 to 375 Low = 1 point

( ) 375 to 1875 Medium = 2 points

( ) 1875 to 3750 Medium = 3 points

( ) Over 3750 High = 4 points

3. Number of departments involved (excluding IT)

( ) One Low = 1 point

( ) Two Medium = 2 points

( ) Three or more High = 3 points

4. Is additional hardware required for the project?

( ) None Low = 0 points

( ) Central processor type change Low = 1 point

( ) Peripheral/storage device changes Low = 1

( ) Terminals Med = 2

( ) Change of platform, for example High = 3

PCs replacing mainframes

Other Categories of Risk

Market risk: Will the new product be useful to the organization or marketable to others? Will users accept and use the product or service?

Financial risk: Can the organization afford to undertake the project? Is this project the best way to use the company’s financial resources?

Technology risk: Is the project technically feasible? Could the technology be obsolete before a useful product can be produced?

What Went Wrong?

Many information technology projects fail because of technology risk. One project manager learned an important lesson on a large IT project:

Focus on business needs first, not technology. David Anderson, a project manager for Kaman Sciences Corp., shared his experience from a project failure in an article for CIO Enterprise Magazine. After spending two years and several hundred thousand dollars on a project to provide new client/server-based financial and human resources information systems for their company, Anderson and his team finally admitted they had a failure on their hands. Anderson revealed that he had been too enamored of the use of cutting-edge technology and had taken a high-risk approach on the project. He "ramrodded through" what the project team was going to do and then admitted that he was wrong. The company finally decided to switch to a more stable technology to meet the business needs of the company.

Risk Identification Risk identification is the process of understanding what

potential unsatisfactory outcomes are associated with a particular project

Several risk identification tools and techniques include Brainstorming The Delphi technique Interviewing SWOT analysis

Potential Risk Conditions Associated with Each Knowledge Area

Knowledge Area Risk Conditions

Integration Inadequate planning; poor resource allocation; poor integrationmanagement; lack of post-project review

Scope Poor definition of scope or work packages; incomplete definitionof quality requirements; inadequate scope control

Time Errors in estimating time or resource availability; poor allocationand management of float; early release of competitive products

Cost Estimating errors; inadequate productivity, cost, change, orcontingency control; poor maintenance, security, purchasing, etc.

Quality Poor attitude toward quality; substandarddesign/materials/workmanship; inadequate quality assuranceprogram

Human Resources Poor conflict management; poor project organization anddefinition of responsibilities; absence of leadership

Communications Carelessness in planning or communicating; lack of consultationwith key stakeholders

Risk Ignoring risk; unclear assignment of risk; poor insurancemanagement

Procurement Unenforceable conditions or contract clauses; adversarial relations

Quantitative Risk Analysis

Assess the likelihood and impact of identified risks to determine their magnitude and priority

Risk quantification tools and techniques include Probability/Impact matrixes The Top 10 Risk Item Tracking technique Expert judgment

SAMPLE PROBABILITY/IMPACT MATRIX

Sample Probability/Impact Matrix for Qualitative Risk Assessment

Chart Showing High-, Medium-, and Low-Risk Technologies

Top 10 Risk Item Tracking

Top 10 Risk Item Tracking is a tool for maintaining an awareness of risk throughout the life of a project

Establish a periodic review of the top 10 project risk items

List the current ranking, previous ranking, number of times the risk appears on the list over a period of time, and a summary of progress made in resolving the risk item

Example of Top 10 Risk Item Tracking

Monthly Ranking

Risk Item This

Month

Last

Month

Numberof Months

Risk ResolutionProgress

Inadequateplanning

1 2 4 Working on revising theentire project plan

Poor definitionof scope

2 3 3 Holding meetings withproject customer andsponsor to clarify scope

Absence ofleadership

3 1 2 Just assigned a newproject manager to leadthe project after old onequit

Poor costestimates

4 4 3 Revising cost estimates

Poor timeestimates

5 5 3 Revising scheduleestimates

Expert Judgment

Many organizations rely on the intuitive feelings and past experience of experts to help identify potential project risks

Experts can categorize risks as high, medium, or low with or without more sophisticated techniques

Quantitative Risk Analysis Often follows qualitative risk analysis, but both can be

done together or separately Large, complex projects involving leading edge

technologies often require extensive quantitative risk analysis

Main techniques include decision tree analysis simulation

Decision Trees and Expected Monetary Value (EMV)

A decision tree is a diagramming method used to help you select the best course of action in situations in which future outcomes are uncertain

EMV is a type of decision tree where you calculate the expected monetary value of a decision based on its risk event probability and monetary value

Expected Monetary Value (EMV) Example

Simulation Simulation uses a representation or model of a system to

analyze the expected behavior or performance of the system

Monte Carlo analysis simulates a model’s outcome many times to provide a statistical distribution of the calculated results

To use a Monte Carlo simulation, you must have three estimates (most likely, pessimistic, and optimistic) plus an estimate of the likelihood of the estimate being between the optimistic and most likely values

What Went Right?A large aerospace company used Monte Carlo simulation to help quantify risks on several advanced-design engineering projects.

The National Aerospace Plan (NASP) project involved many risks. The purpose of this multibillion-dollar project was to design and develop a vehicle that could fly into space using a single-stage-to-orbit approach.

A single-stage-to-orbit approach meant the vehicle would have to achieve a speed of Mach 25 (25 times the speed of sound) without a rocket booster.

A team of engineers and business professionals worked together in the mid-1980s to develop a software model for estimating the time and cost of developing the NASP.

This model was then linked with Monte Carlo simulation software to determine the sources of cost and schedule risk for the project.

The results of the simulation were then used to determine how the company would invest its internal research and development funds.

Although the NASP project was terminated, the resulting research has helped develop more advanced materials and propulsion systems used on many modern aircraft.

Risk Response PlanningAfter identifying and quantifying risks, you must decide how to respond to them

Four main strategies:

Risk avoidance: eliminating a

specific threat or risk, usually by eliminating its

causes

Risk acceptance: accepting the consequences should a risk

occur

Risk transference: shifting the

consequence of a risk and

responsibility for its management to

a third party

Risk mitigation: reducing the

impact of a risk event by reducing the probability of

its occurrence

General Risk Mitigation Strategies for Technical, Cost, and Schedule Risks

Risk Monitoring and Control Monitoring risks involves knowing their status Controlling risks involves carrying out the risk

management plans as risks occur Workarounds are unplanned responses to risk events that

must be done when there are no contingency plans The main outputs of risk monitoring and control are

corrective action, project change requests, and updates to other plans

Risk Response Control Risk response control involves executing the risk

management processes and the risk management plan to respond to risk events

Risks must be monitored based on defined milestones and decisions made regarding risks and mitigation strategies

Sometimes workarounds or unplanned responses to risk events are needed when there are no contingency plans

Using Software to Assist in Project Risk Management

Databases can keep track of risks. Many IT departments have issue tracking databases

Spreadsheets can aid in tracking and quantifying risks More sophisticated risk management software, such

as Monte Carlo simulation tools, help in analyzing project risks

Sample Monte Carlo Simulation Results for Project Schedule

Sample Monte Carlo Simulations Results for Project Costs

Results of Good Project Risk Management

Unlike crisis management, good project risk management often goes unnoticed

Well-run projects appear to be almost effortless, but a lot of work goes into running a project well

Project managers should strive to make their jobs look easy to reflect the results of well-run projects

Thank YouQUESTION ? IF ANY ?